TT RAM MOHAN's comments on the Indian economy, banking and current affairs

Friday, September 18, 2015

Indradhanush gives Nayak committee report a wide berth

Former Axis Bank CMD P J Nayak thinks the government is not serious about banking reform. He thinks Indradhanush, the plan announced by the finance ministry recently, is inadequate:

Indradhanush is inadequate… While it is not
necessary to privatise Indian banks, it will be desirable to do it. It
will be greatly helpful if government’s (equity) share in banks comes
down to less than 50 per cent. A lot of the unlevel-playing field will
immediately disappear....Reforms will begin when the
government decides to rollback the laws.” (The Bank
Nationalisation Acts of 1969 and 1980, the State Bank of India Act, and
SBI (Subsidiary Banks) Act.

One can understand Nayak's disappointment. Indradhanush makes no mention of the Nayak report. There's been some indication that stock options for top management of PSBs is being considered. But the level playing field in terms of compensation that the Nayak committee had urged is nowhere in sight. Perhaps most galling for Nayak, the government has appropriated the agency the committee had suggested for making top appointments at PSBs- Bank Boards Bureau- without embracing the essence of it, namely, that the Bureau should be distanced from government and should entirely comprise professional bankers.

One should not be surprised. Repealing statutes related to public sector banks is quite out of the question in an environment in which the government cannot even get the GST bill passed. Parity in pay between PSBs and private banks will undermine the economics of PSBs. As for making appointments to PSBs, it is unrealistic to expect the government not to want to have a say when the government is accountable to parliament for the PSBs.

Indradhanush does not make radical changes to governance of PSBs. Its centrepiece is infusion of capital into PSBs. Whether the capital infusion is adequate for all banks one is not sure but it is certainly an improvement over their existing situation.